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Editor's Note: Hamish Risk | September 24, 2020
When the ultimate financial insider moves out of oil and into gold you should sit up and listen. As Forest for the Trees explains in today’s Macro Briefing, Warren Buffett’s decision to buy Barrick Gold and sell Occidental Petroleum is not a tactical move, or a dividend play, but reflects a fundamental shift in the global financial system that will see a devaluation of the dollar versus gold and MMT begin in earnest. For those looking to take advantage of a secular rise in gold, Pennock Idea Hub outlines why Canada’s Centerra is in a good position, while Ned Davis Research explains what MMT means for Fed policy. Meanwhile, Ollari Research focuses on the slide in silver prices, setting out why it may signal the end for the dynamics that have been driving global markets since the height of the coronavirus-induced chaos in March, and Integrum ESG runs the rule over HSBC in the wake of the latest money-laundering scandal.
currencies gold miners Oil Forest for the Trees
1. Buffett, Barrick, Gold and MMTWarren Buffett’s move to buy Barrick Gold and sell, among other things, Occidental Petroleum may be a signal that a needed dollar devaluation versus gold – instead of versus oil – is about to begin in earnest via Modern Monetary Theory (MMT), says Luke Gromen of Forest for the Trees in this report. He says for centuries prior to 1971, gold was the fulcrum against which currencies were devalued; however, post-1971 under the petrodollar, oil has been the fulcrum against which the dollar (and by extension, all currencies) have been devalued. Gromen says this dynamic can be seen in a long-term chart of oil prices, which shows that from 1870-1972, oil prices in nominal dollar terms barely changed on net, while from 1972-present, oil prices rose nearly 50 times from trough to peak. More investors are concluding the US will run some version of MMT post-COVID, he says, but few seem to realize that US MMT will likely cause currency crises in Europe, Japan, and China (and with them, a global economic crisis). That is, says Gromen, unless oil is priced in currencies other than the dollar, and gold resumes its pre-1971 role as the primary reserve asset against which the dollar is devalued. He argues those two prerequisites have largely been completed, and that is why Buffett’s move was so significant. Gromen says the implication of gold resuming its role as the fulcrum against which currencies are devalued is that the gold/oil ratio and gold/commodity ratios are likely to continue to rise, possibly to staggering heights, while gold miners – at least certain miners – are likely to become the oil companies or merchant banks of this cycle.
gold miners high conviction idea Pennock Idea Hub
2. Centerra Gold – high conviction ideaEd Pennock at Pennock Idea Hub has issued a note highlighting Canada’s Centerra Gold as a high conviction trade idea after the Toronto-based company’s adjusted EPS of $0.33 came in well above consensus of $0.20. He says the beat at Centerra, which engages in the acquisition, exploration, development and operation of gold and copper properties worldwide, was due to stronger than expected production, particularly at its flagship Kumtor gold mine in the Kyrgyz Republic. Indeed, Pennock notes gold production increased by 10% over the year, while the firm continues to enjoy a strong, debt-free balance sheet with a cash balance of $212 million and total liquidity of $712 million.
Asset correlations precious metals Silver Ollari Consulting
3. Silver – overshooting or canary in the coalmine?Christophe Ollari at Ollari Consulting says investors should be watching the slide in the price of silver very carefully. After all, he says, the metal – which is down almost 15% since the start of the week – is a crucial bellwether of sentiment since its price movements reflect so many key dynamics at work in the market. Silver’s powerful rally post the chaos in March has, says Ollari, been driven by the unprecedented largesse delivered by both the Fed and US government, the collapse of US real yields and the determination of the Fed to reflate the US economy at any cost, not to mention hopes that MMT was on its way. Indeed, he says silver’s rally essentially became a referendum of the Fed’s success, with lower real yields and higher breakevens creating a paradise for silver, as a precious and industrial metal. Either, says Ollari, the market is currently witnessing a typical flush out of a too crowded long positioning on silver, or the current sharp correction is a giant red flag, hinting that the recent dynamics driving the market will be challenged going forward and a more broad-based deleveraging of consensus trades is in the pipeline.
fiscal policy high frequency economic data Ned Davis Research
4. Does economic data matter in an MMT world?As markets digest the implications of the Federal Reserve’s new policy framework, a couple of things have become apparent, says Joseph Kalish at Ned Davis Research. First, he says with monetary policy becoming secondary to fiscal policy, policymakers are taking a step in the direction of MMT, which is moving more into the mainstream. Indeed, according to Kalish, with the Fed relentlessly pursuing maximum employment (assuming inflation doesn’t get out of hand), economic data won’t really matter anymore for Fed policy until much later in the cycle. The Fed, he says, is pursuing more of a social agenda where backsliding from full employment could result in additional easing, while progress has no impact. Of course, says Kalish, data will still matter for earnings, sector performance, and potentially the shape of the yield curve. But for now, he says, the Fed’s reaction function has a high hurdle.
banks ESG Integrum ESG
5. HSBC’s money laundering controversy: How do it’s ESG scores stack upIntegrum ESG was founded in 2018 by the former head of European research at Macquarie Bank, Shai Hill. Integrum provides an ESG ratings dashboard, with data harvested from company reports using AI. They also provide sentiment scores derived from 850,000+ news and social media sites which are reviewed by neural-network AI in real time. Integrum has taken a look at HSBC after the bank’s shares dropped to their lowest level in more than 25 years this week in the wake of media reports that it had flagged billions of dollars in transfers to US anti-monetary laundering authorities between 1999 and 2017. Banks must file suspicious activity reports (SARs) to authorities if they detect transactions that could indicate money laundering or other suspicious activity, and are not necessarily proof of wrongdoing. Integrum says HSBC should be complimented on sending regulators regular and numerous SARs, but the problem is that while some of these activities were seriously suspicious, the bank carried on doing business with some clients – some of whom appear to be Chinese scammers and South American drug lords, according to media reports. As for Integrum’s ESG scores, HSBC ranks poorly, giving it a performance score of 0 (Scale 0-4) for “failures of professional integrity” as there is still a lack of disclosure at the bank, which does not report the number of penalties for corruption and bribery issues that it has received. Meanwhile it has an ”awareness score” of 2, due the fact that it has a SARs policy in place. They’re not alone though. Barclays is another bank that scores 0 in performance. Click below to contact the Integrum if you would like to understand their scores in more detail.